Japan’s currency

Wonupmanship

Can Japan break the yen-won curse?

THE strength of the yen, especially against the South Korean won, has helped spatter Japanese electronics companies with red ink in recent years. Now it has spilled blood. On February 27th Elpida, a Japanese maker of DRAM memory chips, filed the biggest bankruptcy claim of any Japanese manufacturer since the second world war. The main beneficiary of its demise was South Korea's Samsung.

No one would accuse Samsung of thrashing Elpida on currency advantages alone. The electronics giant is nimbler and bolder than many of its Japanese competitors. But the yen/won exchange rate has worked spectacularly in South Korean exporters' favour since the start of the global financial crisis in mid-2008 (see chart). During that period the won has lost roughly 50% in value against the yen, helping South Korean firms undercut the Japanese on price and powering the country back to economic growth. The yen, however, has behaved like a curse. The worse Japan's economic predicament, the more its currency has strengthened.

That is why Japanese exporters are sighing with relief at a 10% drop in the yen's value against the won since its recent high point in early October. That has exceeded the yen's fall against the dollar and the euro. The main factor may be a change in global risk appetite: a rising won is often a barometer of animal spirits. But currency specialists say that the yen's fall appears to have been given more momentum by the recent commitment of the Bank of Japan (BoJ) to buy government bonds until it gets close to a new 1% inflation goal, as well as by a record trade deficit in January. Nicholas Smith of CLSA, a broker, believes much of the extra liquidity could end up in Japanese asset markets: on February 29th the Nikkei, Japan's benchmark share index, hit a seven-month intraday high.

The BoJ is doubtless more concerned with yen/dollar or yen/euro exchange rates than the yen/won rate. In terms of financial transactions these are far more important. But from an industrial point of view—and exporters comprise a powerful lobby in Japan—the yen/won rate matters just as much. Take the rivalries of Sony with Samsung or Honda with Hyundai, for example. From a Japanese standpoint, the South Koreans are far more cut-throat global competitors than American firms.

As for the future, some sceptics doubt that the meddlesome Bank of Korea (BoK) will be able to refrain from cheapening the won. But Daniel Hui of HSBC believes the South Korean currency may continue to strengthen against the yen. He says that is partly because South Korea appears to be comfortable with the level of its foreign-exchange reserves, and also because exporters are confident enough in their resilience that they no longer rely on a cheap currency. One other factor may cause the yen to overshoot on the downside against the won. Korean exporters have been more aggressive than Japanese ones in tapping new markets such as those in emerging Asia; it would take a super-cheap yen for the Japanese to catch up in these markets, reducing pressure for a BoK response.